Dagong Says Will Cut US Rating As Early As Monday

And while our rating agencies still get their marching orders from Bill Gross and from Obama, in that order, China is not waiting. In a just posted Reuters interview, Dagong said on Thursday it plans a further downgrade as early as next week, even as politicians race against the clock to avert a ruinous debt default. Guan Jianzhong, Chairman of the Beijing-based Dagong Global Credit Rating Co, said he still believed U.S. lawmakers will clinch a last-minute deal on the U.S. debt ceiling, but the damage has been done. "We will react soon, probably next Monday or Tuesday. We need to look at whether they reach a compromise and the scope of the compromise, then we decide how deep the rating cut will be," Guan told Reuters in an interview in his spacious office. Naturally, this move will be aped by our own mockeries of a "rating" agency, leading to a very curious paradox: after all is it not the sock puppet at the top of it all - our very own distinguished tax evading eminence Tim Geithner himself who had the following exchange with Fox' Peter Barnes as recently as April: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?” Geithner’s response: “No risk of that.” “No risk?” Barnes asked. “No risk,” Geithner said." So... when the US is downgraded in a week or so.... does that mean it is time to fire Geithner?

As for Dagong, who as usual is ahead of the curve:

"We will definitely cut the rating, regardless whether there will be a compromise. It has already dealt a blow to investors' confidence," Guan said. He said it could slash the rating to D if Washington defaults.

Guan's warning was starker than in an interview with Reuters on July 14, when he threatened to cut U.S. ratings in the coming three to six months if there was no major event to make real improvement in the U.S. fiscal situation.

Economists estimate that China has parked about 70 percent of its $3.2 trillion foreign exchange reserves in U.S. assets.

Naturally, while bashing the US, Dagong is happy to close its eyes to the mess in its own back yard:

In contrast to his bearish view on the United States, Guan said China's economy would remain on a sound footing, which will contain default risks from piles of local government debt.

Dagong has no plan for now to downgrade or monitor ratings of debt issued by local government financing vehicles (LGFVs) or other debt rated by the agency, Guan said.

"I'm not worried about local government debt," he said, pointing to hefty government revenues and state assets.

"The Chinese government is a strong government, it has ability to mobilise resources," he said.

Further more, Chinese banks would not exacerbate default risks by cutting loans to LGFVs.

We expect Moody's to retaliate promptly to Dagong's downgrade of the US by downgrading China in kind, and so the great race to the mutuall assured D-rating of the two great superpowers will enter its second of three laps... A race which will be won by China once it realizes that its $1.2 trillion in US paper will never be repaid.

I went short the long bond contract on the CME, "US Bond"; this morning from 126-08; with profits from other trades detailed elsewhere. this post seems to touch on the subject of Bonds; (credit-worthiness), so I'll post the trade here. Sept. 2011 contract.

The USA defaulted on 15-AUG-1971 when France called Nixon's bluff on having the Gold to back all the US Dollars they held. Nixon had no choice simply because France had more US Dollars than Ft Knox had in physical Gold. Our credit rating should have been downgraded with the closing on the Gold Window.

You guys at ZH just don't understand what Geithner is trying to say. You see, there's no risk of a credit downgrade... until there is a risk of a credit downgrade. In the same way, there's no recession until there is a recession. Likewise, we are not in a depression until we are in one. We're rounding the bend to an economic turnaround until we don't and gold is not better than paper until it is. Any questions, just ask Ben Bernanke. Now THERE is an intelligent, well-educated, we-can-be-safe-knowing-we're-in-his-hands economist!

You guys at ZH just don't understand what Geithner is trying to say. You see, there's no risk of a credit downgrade... until there is a risk of a credit downgrade. In the same way, there's no recession until there is a recession. Likewise, we are not in a depression until we are in one. We're rounding the bend to an economic turnaround until we don't and gold is not better than paper until it is. Any questions, just ask Ben Bernanke. Now THERE is an intelligent, well-educated, we-can-be-safe-knowing-we're-in-his-hands economist!

I wonder how low the rating can go before China can no longer buy US debt....it they still are.....I assume they have regulations that say they can´t by junk...don´t they???? one wonders...pass me another beer...

China does not own these foreign reserves dollars, it is mostly multinationals' investment (FDI) in China. They brought dollars to the Chinese banks to exchange for RMB, so that they can use these RMB to buy equipments, plants, hire people etc. When they decide to leave China, they sell the plants/equipments for RMB, then go back to the Chinese bank to exchange for $s --- so China is just holding the $s for them, the the time being.

Think about it: average FDI per year is $75B, so 75x 20 (years) = $1.5 T and these multinationals also have probably $1T worth of trade supluses.

And the foreign reserves dollars is definitely not profits for the Chinese either.

OK, does this not cut their own throats or is the debt they hold unaffected? Also, this is a fairly strong indication that any future debt that China buys will come with far higher yields. I mean, are they tipping the scales to their terms in a number of ways? And last, I would love to give a shit about China but we have to get our house in order first. Chuckles galore if the US was on the upside at this point.

This bullshit is just crazy. In all honesty I don't read sometimes just to maintain a semblance of past happiness. When does this steaming pile explodes so we can get to the clean-up?

OK, does this not cut their own throats or is the debt they hold unaffected? Also, this is a fairly strong indication that any future debt that China buys will come with far higher yields. I mean, are they tipping the scales to their terms in a number of ways? And last, I would love to give a shit about China but we have to get our house in order first. Chuckles galore if the US was on the upside at this point.

This bullshit is just crazy. In all honesty I don't read sometimes just to maintain a semblance of past happiness. When does this steaming pile explodes so we can get to the clean-up?

OK, here's a little thought exercise: Chinese businesses sell gazillions in the US, garnering gazillions of $US. Unfortunately, being in China, they need Yuan to run their businesses, not $US. Meanwhile, the US businesses sell bupkus in China, earning a few meager Yuan. Unfortunately, they need $US to run their businesses, not Yuan. One thinks that Yuan would appreciate relative to $US under this scenario, given that there are few Yuan here, which Chinese businesses need, and gazilllions of $US there, which US businesses need. But that doesn't happen! The exchange rate is essentially "pegged". The question is... how are all those $US, held by Chinese businesses, converted back into Yuan? Where do all those Yuan, needed to soak up all the $US in China, come from?

(Hint: The Chinese government/central bank seems to end up holding a shitload of US treasuries, which are bought with $US. Can you spot the missing link?)

Never let it be said that Chinese officials aren't every bit as hypocritical as US officials. They just play the game better, that's all.